For most people, owning a car is an absolute necessity for getting to work, picking kids up from school, and running errands. What happens if you are forced to file Chapter 7 Bankruptcy and have a car loan? As part of the bankruptcy proceeding you will need to tell the court, and the lender, what you intend to do with the car loan. The good news is you have choices to reaffirm, redeem, or surrender. Whatever you do you need to choose wisely and seek the help of a qualified attorney. Reaffirming the debt on your car means even though you are in bankruptcy, you continue to make payments and keep the car. The car loan is treated almost like you never had filed for bankruptcy. This means you are responsible for the balance owed on your car loan and paying off that debt. In addition to making the payments, you will need to sign a reaffirmation agreement, and keep the car insured. A reaffirmation agreement is a contract that lists the full balance that you are agreeing to reaffirm, as well as the interest rate, and monthly payment. The agreement requires you to show the court that reaffirming the debt will not cause you an undue hardship. In other words, even with the car payment, you still have enough money to pay your other reasonable and necessary expenses. Almost everyone wants to keep their car but should you sign a reaffirmation agreement or not? This is one of the many details where having an experienced attorney to guide you is critical. 

Here are some points to consider:

Do you owe more than the car is worth? If so, reaffirming may be a risk. What happens if you are in an accident and the car is a total loss? Your insurance pays off only the value of the car, but then you still owe the difference. You may end up paying off a wrecked car while trying to make payments on a different car.

The law gives the lender the option of repossessing your car if you do not reaffirm, even if you are making payments. However, it is an option, they don’t have to repossess. If you are making payments on time some lenders may let you keep the car if you keep it insured. Other lenders will enforce their rights and repossess your car even if you are current on your payments. Here at Speicher & Speicher, P.A. we can help you evaluate the risks, based on your lender.

If your budget is tight, or you expect a decrease in income, you probably should not reaffirm. Consider how long you are going to be making the car payments. Are you going to have the car paid off soon, or do you have several years remaining? Can you negotiate with your lender for a better deal? Some lenders may be open to listening to a proposal that is more favorable to you, such as reducing the principal or the interest rate. Is your lender a credit union? If so you get less protection from the court and you should be more cautious about signing a reaffirmation agreement.

Filing bankruptcy is about making difficult financial choices and it is important that you are honest with yourself. You must be able to choose between what you need and what you want. For example, you may be able do without your car, and choose to surrender the car to the lender thereby relieving you of the loan obligation.